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Commentary: Seeing the elephants in the room

By Richard Banks Two weeks ago, in London, Euromoney held its annual Bond Investor’s Congress. We gathered some 300 major investors in the global bond markets — as well as government debt management officials, bankers and analysts. Top of the discussion topic list was the — then pending — Greek debt deal. We asked our audience …

Two weeks ago, in London, Euromoney held its annual Bond Investor’s Congress. We gathered some 300 major investors in the global bond markets — as well as government debt management officials, bankers and analysts. Top of the discussion topic list was the — then pending — Greek debt deal. We asked our audience (who are the ones who need to be convinced) how many of them believed that this bail out was the end of the Greek crisis — not a single one put their hand up.

The global bond investors — the ones who really need to be convinced because they provide the money — weren’t buying it. They know, as we do, that Greece is bust. But the politicians resolutely insist that it isn’t. They seem to believe that if we only try hard enough the elephant standing in the corner will go away. It’s the denial you see among Dubai developers in Japan in the whole of the 1990s.

It’s also the same denial we have seen for many years in Egypt.

Yes, the Egyptian economy became more productive from 2004 to 2011. Telecoms, IT, banking and hydrocarbons attracted good investors with good business practices who have built good businesses benefiting Egypt and Egyptians. But so much of the economy at the macro and the micro level remained unchanged, unproductive and unfair.

The subsidy system, the tax system, the bloated quasi-government companies, the poor infrastructure, the unemployment and underemployment were off-limits to public discussion and subject to repeated official denial. It is not a problem, it doesn’t exist, it should not be spoken about. Egypt didn’t have an elephant in the room — it had a herd — and the herd finally got angry!

Just over a year later we are beginning to see the real picture of Egypt’s economy. Not just that part of the economy affected by the revolution and the events succeeding it — but the structure of the economy. We are seeing the elephants. And they are scary.

So what do we do? I really believe that current strategies for the Egyptian economy are, like the Greek debt strategy, using yesterday’s ideas to fight today’s challenges. The Greek bond deal might reduce debt to 120 percent of GDP within five years. Great, but 120 percent is high even for an economy which is efficient, productive and growing. And Greece’s economy is structurally uncompetitive within the Eurozone, archaically organized and with no clear growth plan. How is that being addressed? With the same tools that were used to address every crisis in the past. Nothing innovative, nothing new and, in my opinion, just another example of European political leadership lacking the courage necessary to make the tough changes essential to get Greece back on its feet — or out of the Euro.

Egypt, like Greece, needs a new approach. A new paradigm to follow. I believe it could start in the management of state owned-assets. A good example to consider is that of Mumtalakat in Bahrain. This is not a sovereign wealth fund but a holding company for all the state’s assets — good and bad. It has stakes in national and international companies. It has a land bank. It has stocks and bonds. It has a mandate to manage these assets efficiently for the benefit of the people of Bahrain.

It is not about selling off assets to cronies or foreign asset strippers or even the global markets at fire-sale prices. It is about freeing those assets from political control so that they can be managed for economic benefit — including employment of locals. It is about turning the ministries into regulators and policymakers — not owners and managers. It is about freeing the assets of the people from the control of the bureaucrats and officials. Last time I looked, Bahrain was 100 times smaller than Egypt — but the concept has legs and should be considered seriously — either nationally, by governorates, or even by sector.

Other innovative ideas, like those of my friend Hernando De Soto, are what Egypt needs — not more of the same approach. Egyptians need to give their leaders the courage to be innovative — because yesterday’s thinking is not going to solve today’s crisis.

These and other ideas will be discussed by Euromoney Conferences at our 2012 Egypt Conference — to be held in Cairo on September 25-26, 2012.

Richard Banks is Director of Emerging Markets at Euromoney Conferences.